03.23.10

HIRE Act - Hiring Incentives to Restore Employment Act

To help jumpstart business hiring and spending, Congress has passed, and President Obama has signed, the Hiring Incentives to Restore Employment (HIRE) Act (H.R. 2847). The HIRE Act provides for payroll tax forgiveness and an employer tax credit of up to $1,000 for qualified new hires. The HIRE Act also extends enhanced Code Sec. 179 small business expensing and makes some enhancements to tax credit bonds. These measures are paid for, in part, by comprehensive reforms to the reporting and disclosure of accounts in foreign financial institutions, a further delay in implementation of worldwide allocation of interest and an acceleration of certain corporate estimated income tax payments. The HIRE Act is expected to be the first of several targeted jobs bills to be passed by Congress in 2010.

Hiring Incentives:  The HIRE Act provides qualified employers with temporary payroll tax forgiveness of the employer’s 6.2 percent share of Social Security payroll taxes on wages paid to new hires who had been previously unemployed. Payroll tax forgiveness is effective for qualified employees on wages earned for work after March 18, 2010 and on or before December 31, 2010. A qualified employee must begin work any time after February 3, 2010 and before January 1, 2011. The employer generally must be a private sector forprofit or tax-exempt employer (with some limited exceptions).

The newly hired worker must not have been employed for more than 40 hours during the 60-day period ending on the date that the individual begins employment. Additionally, the newly hired employee cannot displace a worker who is currently on the employer’s payroll unless the worker voluntarily separated from employment or was separated from employment for cause. Newly hired individuals who are related to the employer or who own (directly or indirectly) more than 50 percent of the business are ineligible. A qualified individual may be hired for any number of hours, full-time or part-time, since the benefits to the employer are tied only to 6.2 percent of any salary paid.

The HIRE Act requires that individuals certify they have not been employed for more than 40 hours during the 60-day period ending on the date they begin employment. The IRS is expected to issue guidance on the certification requirement.

Let’s take a look at an example. 

• ABC Co. hires Jean on January 25, 2010 as a full-time employee working 40 hours each week. ABC hires Luis on February 15, 2010 as a full-time employee working 40 hours each week. ABC hires Sam on March 1, 2010 as a full-time employee working 40 hours each week. Jean, Luis and Sam all certify that they had not been employed for more than 40 hours during the 60-day period ending on the date that they began employment with ABC Co. However, Jean is not a qualified employee for purposes of payroll tax forgiveness under the HIRE Act because her hire date is before February 4, 2010. Luis and Sam are qualified employees for purpose of payroll tax forgiveness because their hire dates are after February 3, 2010.

Keep in mind that the HIRE Act’s payroll tax forgiveness applies only to the employer’s share of Social Security taxes. Employers remain liable for Medicare payroll taxes. The worker also must pay his or her share of Social Security taxes as well as federal income taxes.

The HIRE Act also provides that the direct payroll tax holiday will not apply to wages paid during the first calendar quarter of 2010. Instead, whatever tax holiday amount would have been allowed for first quarter 2010 will instead be credited against the employer's general OASDI liability for the second quarter of 2010. Beginning for any new-hire wages paid starting April 1, an employer takes direct OASDI forgiveness into account in depositing payroll taxes under the regular deposit rule applicable to that employer.

Retained worker business credit:  Under the HIRE Act, employers that hire new workers who qualify for payroll tax forgiveness may also be eligible for a tax credit for each qualified employee. For the employer to be entitled to this new credit, the qualified employee must be retained on the employer’s payroll for 52 consecutive weeks. The business credit under Code Sec. 38 will be increased, with respect to each qualified retained worker, by the lesser of $1,000 or 6.2 percent of wages paid by the taxpayer to the qualified retained worker during the 52 week period.

A qualified retained worker must be paid an amount equal to at least 80 percent of his first 26 weeks of wages during the last 26 weeks of the 52-week qualifying period. The HIRE Act excludes wages earned by a domestic worker or an individual eligible for the foreign earned income exclusion. The HIRE Act also includes carryback rules for the credit.

If you have any questions about payroll tax forgiveness or the retained worker business credit, please contact our office for more details.

Expensing:  Under Code Sec. 179, businesses can elect to recover all or part of the cost of qualifying property, up to a limit, by deducting it in the year it is placed in service. Before the HIRE Act, Code Sec. 179 expensing for 2010 was limited to $125,000 with a $500,000 cap (both amounts adjusted for inflation). The HIRE Act raises the dollar limit to $250,000 and the cap to $800,000 (the same amounts in place in 2009). Under the HIRE Act, write-offs can be taken under phaseout rules until qualified purchases reach $1,050,000. The HIRE Act applies to qualified purchases made in tax years beginning after December 31, 2009 and before January 1, 2011. The HIRE Act also provides that off-the-shelf computer software, a popular business purchase, is Code Sec. 179 property.

Tax credit bonds:  The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) created the new Build America Bond program, which authorizes state and local governments to issue Build America Bonds. These are taxable bonds issued in 2009 and 2010 to finance any capital expenditures for which state and local governments could issue tax-exempt governmental bonds. At the election of the state or local government, the U.S. Treasury will make a direct payment to the issuer in an amount equal to 35 percent of the interest payment on Build America Bonds. This feature is designed to provide a federal subsidy for a larger portion of the borrowing costs of state and local governments than traditional tax-exempt bonds.

The HIRE Act allows issuers of existing tax credit bonds to treat bonds issued after March 18, 2010 as Build America Bonds. Consequently, issuers would qualify for the direct subsidy under Build America Bonds. Some of the tax credit bonds that may qualify include renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds, and qualified school construction bonds.

Foreign accounts:  The Bank Secrecy Act requires taxpayers to report if they have a financial interest in, signature authority or other authority over one or more accounts in a foreign country, and the value of the account exceeds $10,000 at any time during the calendar year. The Bank Secrecy Act does not prohibit taxpayers from owning a foreign bank account. It just requires reporting and disclosure. The rules apply to all citizens and residents of the U.S. as well as domestic corporations, estates, partnerships, and trusts.

The HIRE Act imposes additional reporting and disclosure requirements on taxpayers and financial institutions. Generally, individuals with accounts in foreign financial institutions must disclose on their federal tax returns the name of the financial institution, the account number and the maximum value of the asset during the tax year. The aggregate value of the foreign financial assets must exceed $50,000 for the disclosure requirements to apply. The HIRE Act provides penalties for failing to disclose. The penalties range from a low of $10,000 to a high of $50,000. A 40 percent penalty will apply to the portion of any underpayment attributable to an undisclosed foreign financial asset.

Foreign financial institutions will also be subject to heightened reporting requirements. Generally, foreign financial institutions will be required, among other things, to report the name, address and tax identification number (TIN) of each account holder who is a specified U.S. person. The HIRE Act also will require withholding agents— starting after 2012—to withhold 30 percent of certain payments to foreign financial institutions that do not agree to the new reporting requirements.

Along with the heightened reporting and disclosure measures, the HIRE Act also increases the statute of limitations to six years for failure to report certain offshore transactions and income. The HIRE Act also clarifies when a foreign trust is considered to have a U.S. beneficiary and addresses the treatment of substitute dividends and dividend equivalent payments.

The foreign account compliance measures in the HIRE Act are very complex. The IRS is expected to issue guidance on the measures. Please contact our office if you have any questions about the foreign account compliance provisions in the HIRE Act.

Worldwide allocation of interest:  Qualified taxpayers may elect to take advantage of a rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer’s foreign tax credit limitation. Implementation of worldwide allocation of interest was enacted in 2004 but has been delayed several times. The HIRE Act further delays implementation to tax years beginning after 2020.

Corporate estimated income taxes: Generally, a corporation is required to make quarterly estimated payments of income tax during its tax year. The HIRE Act increases the estimated payment required to be made by corporations with assets of $1 billion or more in July, August or September of 2014, 2015 and 2019 with proportional reductions for the respective subsequent installment periods.

Pending legislation:  Congress continues to debate several other bills designed to stimulate economic growth. Pending bills include a package of extenders. These are popular but temporary tax breaks, which generally expired at the end of 2009. Congress is also debating an extension of COBRA premium assistance, which provides a subsidy to qualified individuals to help offset the cost of COBRA continuation coverage. Also waiting for passage in Congress is an extension of the federal estate tax, which expired for decedents dying after December 31, 2009. Several retirement and pension bills are also pending. Additionally, Congress has to approve a fiscal year (FY) 2011 budget for the IRS. The Obama administration has asked Congress to increase the IRS’s funding for enforcement, compliance and customer service. Finally, Congress is also expected to act shortly on health care reform. At least initially, a new health care law will introduce a new level of complexity for many individuals and businesses alike. Health care reform, if enacted, is expected to be implemented over several years.

If you have any questions about the HIRE Act or pending legislation, please contact our office.

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